Amazon CEO Andy Jassy warns of “short-term headwinds” in key AWS businesses
The Amazon Web Services ( AWS ) business that Amazon ( AMZN ) CEO Andy Jassy used to run is beginning to suck as the economy slows and competition from Microsoft and others in the cloud heats up.
“Despite 29% year-on-year (“YoY”) growth in 2022 at $62 billion [billion] revenue base, AWS faces short-term headwinds right now as companies are more cautious about spending given the challenging current macroeconomic conditions,” Jassy acknowledged in his second annual shareholder letter Thursday.
Jassy, who took over as CEO from billionaire entrepreneur Jeff Bezos in July 2021[ads1], is also dealing with layoffs and overall slowing growth elsewhere.
“While these near-term headwinds soften our growth rate, we like a lot of the fundamentals we see in AWS,” Jassy added in the letter to shareholders. “Our new customer pipeline is robust, as are our active migrations.”
Stabilizing the AWS business is mission critical in the minds of Wall Street.
“Reducing cloud demand remains a key issue as companies shift their focus from accelerating cloud migration to optimizing cloud costs,” Jefferies analyst Brent Thill wrote in a client note earlier this week. “AWS estimates continue to contract, with consensus suggesting year-over-year growth bottoms in 2Q23. Given that AWS accounts for the vast majority of Amazon’s operating revenue, a stabilization in the cloud is critical for shares to outperform.”
Thill’s analysis shows 2023 sales estimates for AWS continue to decline, with estimates currently 12% lower than they were in February 2022 and 5% lower compared to the start of the year. Operating margin estimates for AWS are falling at an alarming rate, Thill noted, with 2023 AWS operating margin estimates down 27% from where they were in February 2022.
Thill cut its 2023 AWS operating margin estimate by 3.5% in the new note. The analyst does not see operating margins improving for AWS until 2024.
Other stats on AWS to consider from Thill’s analysis:
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Consensus estimates suggest that AWS growth will bottom out in the second quarter of 2023.
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AWS’s year-over-year net sales growth has slowed for four consecutive quarters.
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Growth in the AWS reserve has slowed for three consecutive quarters.
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AWS operating margin remains under pressure since peaking at 35% in Q1 2022, with Q4 2022 AWS operating margin at 24.4% representing the lowest levels since Q2 2017.
Thill argues that the decline in AWS is the main reason Amazon’s stock has underperformed poor tech rivals over the past year.
Amazon shares have fallen 35% in the past year, trailing small declines in sky rivals Microsoft ( MSFT ) and Salesforce ( CRM ).
And Amazon shares have fallen 44% since Jassy took over as CEO, compared with a 6% decline for the S&P 500 during that time.
Jassy, meanwhile, has drawn about $250 million in total compensation, according to the company’s proxy statement also filed today.
Brian Sozzi is Yahoo Finance’s managing editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Advice on agreements, mergers, activist situations or other things? Email brian.sozzi@yahoofinance.com
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